The violations in the foreign exchange benchmarking process could also lead to criminal investigations, but just as big banks are

Bloomberg has reported that US derivatives regulatory body, CFTC, passed on evidence of criminal behavior to the US Department of Justice. The regulator has allegedly found incriminating evidence related to manipulation of the ISDAfix (International Swaps and Derivatives Association fix).

The ISDAfix is an interest rate benchmark used to determine annual swap rates for swap transactions. The service delivers an average mid-market swap rate for six major currency pairs at selected maturities every day. The allegations came as rates are determined by midday or end-of-day polling of mid-market rates.

The ISDA benchmark is used to price rates for trillions of dollars worth of derivatives products.

Back in July, the International Swaps and Derivatives Association, Inc. (ISDA), announced that after a competitive selection process, the ICE Benchmark Administration Limited (IBA) has formally assumed the role of ISDAFIX administrator.

The IBA formally has started administrating and calculating the ISDAfix in US dollar, euro, British pound and Swiss franc since August 1st, 2014.

Civil Court Proceedings

Last week, about a dozen big banks were faced with a set of new allegations relating to collusion to manipulate the ISDAfix rate used for determining interest rate charges on derivative contracts.

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A US civil lawsuit filed by a small Alaska Electrical Pension Fund, is seeking damages from 13 banks and inter-dealer broker ICAP. The filing alleges that the defendants colluded to fix the ISDAfix rate at “artificial levels” allowing them to significantly reduce the interest rates they were paying on derivatives trades.

UK’s Serious Fraud Office Already Investigating FX Fixing

Meanwhile, the UK’s Serious Fraud Office (SFO) has already started working on its own FX fixing manipulation investigation, following in the footsteps of the Financial Conduct Authority‘s (FCA) investigation in the UK.

A US Department of Justice criminal proceeding against financial institutions on fixing FX rates can seriously damage the reputation of global financial institutions worldwide.

But let’s get realistic for a moment – no major banks have managed to stay out of the investigation, despite reports about Swiss bank UBS being the first to cooperate with authorities and potentially receive immunity, as it already has with the LIBOR investigation case.

While there is a growing likelihood that leading global financial institutions will be forced to put reserves aside for handling the already escalated legal costs related to fraudulent FX market conduct, the likelihood of a major criminal probe against an institution is very slim.

Such an event equals the demise of a company and since almost all financial institutions being targeted in these investigations are systemically important, a court decision can wreak havoc across the financial markets – a political cost too high to be paid by the governments.

Charges may be filed, but the strong hand of justice is not likely to prevail (for now). Financial penalty is much more efficient in addressing such cases and in order to keep paying those, major financial institutions won’t get incriminated.